Question

1) The federal budget

A) is required to balance by law.
B) can have a surplus but not a deficit.
C) can have a deficit but not a surplus.
D) can have a deficit or a surplus but cannot be balanced.
E) can have a deficit, a surplus, or a balance

2) If the federal government has a budget surplus, then it is definitely the case that

A) tax revenue exceeds government outlays.
B) tax revenue and government outlays are equal.
C) the tax revenue is falling and government outlays are rising.
D) government outlays exceed tax revenue.
E) the tax revenue is rising and government outlays are falling.

3) The national debt is the amount

A) by which government tax revenue exceed outlays in a given year.
B) of debt outstanding that arises from past budget deficits.
C) by which government outlays exceed tax revenue in a given year.
D) of government outlays summed over time.
E) of all future entitlement spending.

4) In order to help the economy recover from a recession using fiscal policy, the government can ________ so that aggregate demand increases.

A) cut taxes
B) raise taxes
C) cut government expenditure on goods and services
D) raise interest rates
E) decrease the quantity of money

5) To eliminate a recessionary gap, the government can ________ government expenditures on goods and services or ________ taxes.

A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
E) increase; not change

6) Automatic stabilizers are defined as

A) actions taken by the President without Congressional consent to stabilize the economy.
B) actions taken by an act of Congress to stabilize the economy.
C) policy that stabilizes without the need for action by the government.
D) discretionary policy taken to stabilize the economy.
E) policy that has no multiplier effects.

7) An example of automatic stabilizer is

A) Congress passing a tax rate reduction package.
B) the federal government expanding spending at the Department of Education.
C) expenditure for unemployment compensation increasing as economic growth slows.
D) the Federal Reserve reducing interest rates as economic growth slows.
E) a change in taxes that has no multiplier effect

8. A flat tax:

A) is designed so that everybody would pay the same number of dollars in taxes.
B) is designed in such a way that as a person's income rises, the tax rate falls.
C) is designed so that everybody would be charged the same percentage of their income.
D) is designed to take a smaller percentage of higher incomes as compared to lower incomes.

9. If the government sought to use fiscal policy to end an unsustainable inflation, what would happen to a previously existing budget deficit?

A) It would get larger.
B) It would get smaller.
C) It would get larger if it used changes in government purchases, but smaller if it used tax changes.
D) It would get smaller if it used changes in government purchases, but larger if it used tax changes.

10. Which of the following now accounts for the highest percentage of state and local spending?

A) Education
B) public welfare
C) Transportation
D) social security

11. A regressive tax:

A) is designed to take a larger percentage of higher incomes as compared to lower incomes.
B) is designed in such a way that as a person's income rises, the amount of tax as a proportion of income rises.
C) takes a greater proportion of the income of lower-income groups than of higher-income groups.
D) is considered to be the most equitable type of tax.

Exhibit 14-1

A flat tax plan allows individuals to deduct a standard allowance of $25,000 from their wages. Assume that the flat tax rate is 12%.

12. Refer to Exhibit 14-1. How much income tax would you have to pay if you were earning $20,000 a year?

A) $2,400
B) $1,200
C) $3,000
D) zero

13. If the federal government was originally running a balanced budget, expansionary fiscal policy would cause the government to run a deficit, whether it changed government purchases or taxes.

True
False

14. If unemployment is the most significant problem in the economy, which of the following actions would be an appropriate fiscal policy response?

A) decrease taxes
B) decrease transfer payments
C) decrease the federal deficit)
D) all of the above

15. An increase in transfer payments combined with a decrease in government purchases would:

A) increase AD.
B) decrease AD.
C) leave AD unchanged.
D) have an indeterminate effect on AD.

16. If the marginal propensity to consume is 4/5, the multiplier is:

A) 20
B) 5
C) 1
D) 1/5

17. Among the following MPC values, which one would have the highest multiplier effect?

A) 1/3
B) 2/3
C) 3/4
D) 2/5

18. To achieve a $500 billion increase in AD, if the MPC is 0.8, what increase in government purchases would be called for?

A) $625 billion
B) $500 billion
C) $400 billion
D) $100 billion

19. A $100 billion decrease in government purchases would:

A) increase AD by $500 billion if MPC = 0.8.
B) decrease AD by $300 billion if MPC = 2/3.
C) increase AD by $200 billion if MPC = 0.5.
D) decrease AD by $40 billion if MPC = 0.4.

20. If the government decides to spend an extra $5 billion on fighter jets that they would otherwise have spent on road construction, and the MPC = 0.75, what is the effect on AD?

A) It has no effect.
B) It increases by $5 billion.
C) It increases by $15 billion.
D) It increases by $20 billion.

21) Monetary policy decisions are made by the

A) Federal Reserve Economic Committee.
B) Federal Open Market Committee.
C) Council of Economic Advisors.
D) Congress of the United States.
E) U.S. Mint.

22. The idea behind money as a standard of value is that use of money allows:

A) greater efficiency in direct exchange.
B) receipt of income to be separated from spending.
C) persons to hold spending power for some period of time.
D) prices to be quoted in money terms.

23. The benefits received principle means those with the least ability to pay should be the ones to receive the benefits.

True
False

24) For anything to be considered money it must be

A) a valuable commodity, such as gold.
B) a token, such as a green piece of paper.
C) either a commodity or a token, as long as it is generally accepted as a means of payment.
D) a mystical token, such as whale teeth.
E) used in barter transactions.

25. For an asset to be a "means of deferred payment" means the asset

A) is valuable and backed by gold.
B) is valuable and backed by the government.
C) can be used to settle a debt.
D) requires a double coincidence of wants.
E) must be used when bartering.

26. When the Fed purchases government securities from a commercial bank, the bank:

A) automatically becomes poorer.
B) loses equity in the Fed.
C) receives reserves that can be used to make additional loans.
D) loses its ability to make loans.

27. Barter requires the

A) use of commodity money as a medium of payment.
B) use of fiat money as a medium of exchange.
C) the triple non-coincidence of wants.
D) exchange of goods and services directly for other goods and services.
E) use of money as a unit of account.

28) The unit of account is defined as

A) the exchange of goods and services directly for other goods and services.
B) barter.
C) an object that is accepted in return for goods and services.
D) an agreed upon measure for stating prices of goods and services.
E) the medium of exchange.

29) When we put a price tag on goods and services, we are using money as a

A) store of value.
B) medium of exchange.
C) barter token.
D) unit of account.
E) means of payment.

30) When we keep part of our wealth in a bank checking account, we are using money as a

A) store of value.
B) medium of exchange.
C) barter token.
D) unit of account.
E) unit of currency.

31) Banks earn a profit by

A) keeping as many reserves on hand as possible.
B) making loans at a lower interest rate than the rate that they offer on their deposits.
C) charging an interest rate on their depositors' accounts.
D) making loans at a higher interest rate than the rates that they offer on their deposits.
E) not paying interest on their reserves.

32. If the reserve requirement was 15% and a bank customer makes a deposit of $500, the initial result would be:

A) a $75 increase in required reserves and a $425 increase in excess reserves.
B) a $425 increase in required reserves and a $75 increase in excess reserves.
C) a $75 increase in required reserves and a $3,333 increase in excess reserves.
D) a $3,333 increase in required reserves and a $425 increase in excess reserves.

33) As the central bank, the Federal Reserve System provides banking services to

A) individuals and controls the quantity of money.
B) the government and the stock market.
C) foreign corporations and determines the exchange rate.
D) banks and regulates financial institutions.
E) banks and determines how much the U.S. government will borrow

34. Fractional reserve banking takes its name from the fact that:

A) banks hold only a fraction of their reserves at the bank itself.
B) banks keep only a fraction of total deposits on reserve.
C) banks reserve only a fraction of their activity for lending.
D) all of the above

35. An important effect of fractional reserve banking is that:

A) bankers' choices about how much to lend can affect the money supply.
B) the commercial banking system has complete control over total reserves.
C) bankers always turn every dollar of excess reserves into loans.
D) a new bank deposit allows a bank to extend loans of the same amount to borrowers.